The Budgeting Process: How to Create a Budget to Reach Your Financial Goals

Name: The Budgeting Process: How to Create a Budget to Reach Your Financial Goals
Uploaded: 2013-04-10T17:38:43+00:00
Duration: 6 min 11 s
Channel: Brian Tracy
Description: Brian Tracy explains why entrepreneurs must prepare budgets and accurate financial forecasts to set sales, expense, and profit goals. He recommends…

10 Apr 2013 · 6 min

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6:11

Brian Tracy explains why entrepreneurs must prepare budgets and accurate financial forecasts to set sales, expense, and profit goals. He recommends creating a complete budget before starting operations, projecting 12–24 months ahead (and updating the next 12 months monthly), and emphasizes four core numbers to track each month: projected sales, total costs, monthly profit/loss, and cumulative profits/losses. He stresses realistic sales projections (high/medium/low scenarios), capturing 100% of costs (fixed, variable, semi-variable), and using budgets to spot trends, plan borrowings, and demonstrate credibility to lenders.

Questions this video answers

12 to 24 months of business operations.

Each month as you get new information.

High (if everything goes well), medium (based on current activity), and low (based on seasonal changes or setbacks).

Projected sales/revenue; total costs to achieve that sales level; profit or loss from operations for the month; cumulative profits/losses over months.

Chapters

One of the most important skills of the entrepreneur is the ability to prepare budgets and accurate financial forecasts for your business. Your ability to set financial goals for sales, expenses and profits is a true measure of your ability to succeed in business. All successful business people are very careful about these numbers. Now the purpose of the budget is to give you a visual description of the expected financial results of your business activities. You can't hit a target that you can't see now. The budget should cover 12 to 24 months of business operations. One of the characteristics of top people is that they think ahead and they project forward into the future. So you can start with the paper spreadsheets that you fill out with a pencil, or you can use computer programs like Excel, which we use, which enable you to change numbers quickly. You should work out a complete budget before beginning business operations. And if you haven't, you should start working out a complete budget right now. Then you should review and revise and update your budgets for the next 12 months each month as you get new information. It's very important. One of the most important things in business is the trends. And only by measuring you your actual experience against your projected experience can you anticipate trends before things change. Big businesses and little businesses go broke every month because they didn't see the trend until it was too late. And numbers enable you to see the trend now. A basic business budget contains four major numbers. The top number is your projected sales and revenue. How much do you think you're going to sell? And this is the oxygen to the brain of the business. You've got to have an accurate idea of that and then you need projected total costs of achieving that level of sales and revenue. What are 100% of the cost of products, services, people, utilities and everything else? The profit or loss from operations is based on the two numbers above. The cumulative total of profits and losses on a month to month basis is the fourth line on your budget. Now the first and most important number is the top line, the estimated sales for the month. This number will be the result of a complete analysis of your marketing and sales activities. This is really important. In fact, your ability to project this accurately is essential. Every single company in Wall street is judged based on its sales activities and its real sales versus its projected sales. Just take a look at any financial newspaper any day and you'll look at how sales activities determine the value of the stock, just as they determine the value of your company. So your ability to project this number top line with accuracy is a key measure of your talent as a business person. You should have three different numbers for this top line. First of all, high sales estimates based on if everything goes well, medium sales estimate based on current activity, and a low sales estimate based on seasonal changes or setbacks. The key rule is that your business should be profitable even if your low sales estimate turns out to be correct. Your sales and revenue projections should be based on experience, market analysis and research, and then continually updated as you get more knowledge and experience. In the second part of your budget, you include all the costs of operation involved in producing and delivering the product or service to the customer. You include all the costs of purchasing or producing the product or service. You include all the costs of sales and marketing and operation of your business. Then you include all fixed and variable and semi variable costs of business operation, which means your utilities and salaries and wages and telephone and computer and Internet and telephone expenses of your portables and so on. Get every single penny down there. Your final number should include 100% of all out of pocket expenses necessary for you to achieve your estimated sales revenues and of course especially your advertising and marketing costs. The third major number that we're talking about is the total profit or loss from operations for that month. There will sometimes be months of the year where your business loses money. In a new business startup, the first few months will usually show losses. It's the general sales and profit trends that are most important, and you can only analyze these by writing down the numbers. The final number on your balance sheet or your budget is the cumulative profits or losses of the company over a period of months. Profits and losses are added together each month to get a total. These totals tell you when your business will break even and begin earning a profit. The total losses will tell you how much money you will have to borrow or provide to the business before it's profitable. You'll require this business budget to borrow money from any bank or lending institution. They will demand it up front and they will not even talk to you unless you can give them very clear financial projections and you can back up those projections with solid research and information. An accurate business budget tells you and others that you really know what is going on in your business and that you're the kind of person that they should lend money or advance money to to help you get to break even and then into profitability. So you should create a budget for each month and for each year at least 12 to 18 months ahead. I hope you enjoyed this video. If you did, please subscribe to my channel by clicking on the button that appears on the screen.